Tuesday, March 8, 2016

Trump vs. the stock market

The broad equities market has gotten a respite from the selling
pressure which plagued it for the last few months. Some of this can
be attributed to the Kress cycle “echoes” which we reviewed earlier this
year. The echoes, which are based on the 6-year, 10-year, and
30-year cycles, suggested that stocks could experience a rally in the
March-April time frame based on past rhythms. To date that
expectation has materialized as traders cover short positions that were built
up to excessive proportions in prior months.

Adding to the upside in equities lately has been a long overdue
relief rally in commodities and natural resource stocks. Much of the
selling pressure plaguing stocks in recent months was a spillover of commodity
market weakness. With commodities now on the upswing, stocks are
getting a major reprieve.

The following chart shows the PowerShares DB Commodity Index
Tracking Fund (DBC), which largely corresponds to the CRB commodity price
index. The greater the distance DBC puts between its January low,
the better it will bode for the near-term stock market outlook. A
continued rally in commodities would also signal to investors that the global
market crisis is in a condition of stasis. This in turn should serve
to increase risk appetite among investors.

To date, all the classic signs of an interim bottom are in
place. The NYSE advance-decline (A-D) line is outperforming the NYSE
Composite Index. NYSE advance-decline volume is also confirming the
rallies. Most importantly, the number of stocks making daily new
52-week lows on the NYSE has drastically fallen under 40 since last
month. This tells us that the market’s internal health is improving and
that internal selling pressure is no longer a major problem.

Moreover, the short-term and intermediate-term rate of change
(momentum) of that new highs-new lows have dramatically improved in recent
weeks. Because the number of stocks making new lows has dropped
significantly while the overall hi-lo differential has been positive, the
momentum of the new highs-new lows has finally turned up after being down for
months. This indicator has been an invaluable aid to confirming that
the near-term path of least resistance for stocks since last month is up.

Arguably the biggest boost to equities in the near term has been
the upward turn in the crude oil price. Oil is widely regarded as
the most important indicator for the overall health of the global
economy. Plunging prices in the energy market in past months created
a deflationary scare among investors and stoked fears of a global economic
recession. Those fears aren’t completely without foundation, but for
now another proverbial bullet has been dodged as the oil price enjoys a
much-needed relief rally.

Finally, I would point out the bullish nature of the Dow Jones
Transportation Average (DJTA) which has also been a strong leading indicator
for the broad market – particularly the Industrials. The leadership of the DJTA has been bullish
from a Dow Theory perspective, especially since the Transports led the way
lower for the Industrials last year.

As the following graph shows, DJTA is about to test an important
chart resistance at the 7,800 area. A
breakout above this level would pave the way for another leg higher in the
major indices from a Dow Theory standpoint.

In the previous commentary I noted that the
bulls would likely do everything in their power to protect the 9,000 level in
the NYSE Composite Index (NYA) from being violated. The NYA found support above 9,000 and has
benefited from a vigorous short-covering rally since as the implications of a
breakdown below this key technical level are simply too severe to happen at
this time.

One reason for the premature nature of a break
under 9,000 is the spillover impact such a breakdown would have on the global
financial economy. The upcoming
presidential election is another factor.
Surpassing worries over the global economy
lately has been the hysteria over the U.S. presidential
race. Investors have been polarized over the leading candidates in
both parties, particularly over the primary victories of a certain billionaire
candidate. My policy of not commenting on politics forbids me from
injecting an opinion, but I’d like to share at least one insight.

The current Republican
front-runner has undeniably garnered a rather sizable protest vote among
disenchanted voters. In many ways Mr. Trump’s candidacy recalls the
populist uprisings of past elections which saw the short-term success of
candidates William Jennings Bryan, George Wallace and Ross Perot. In
each of these cases an uncertain economic outlook led to the rise of dark horse
populist front-runners.

In the final analysis,
however, America’s inveterate tendency to vote for the most electable candidate
(based on the conventions of the day) won out and the extremism that
characterized the earlier stages of the elections was ultimately
discarded. Observers should keep that in mind as the country’s
collective passions rise with temperatures this spring.

It also would appear
that Mr. Trump’s ascension has been tied, to an extent, to the economic and
equity market sluggishness of the last year. Indeed, his biggest
victories to date have occurred when stock and commodity prices have been on
the downswing and the market has been internally weak. But what
happens if the market rebound gains traction and continues beyond March-April
seasonal strength? Could this not fuel a resurgence in the prospects
of his closest rival for the nomination? If nothing else it would
erode deflation fears among investors, which in turn would defuse the urgency
of the protest vote. While some may scoff at this unorthodox
association, pundits would do well to monitor the correlation in the weeks and
months ahead.